TMI Blog2018 (7) TMI 1826X X X X Extracts X X X X X X X X Extracts X X X X ..... but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State. When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue. - Civil Appeal No. 3327 of 2007 - - - Dated:- 30-7-2018 - Mr. Ranjan Gogoi, Mr. N.V. Ramana, Mr. R. Banumathi, Mr. Mohan M. Shantanagoudar, Mr. S. Abdul Nazeer For the Appellant(s) : Mr. Sanjay Kr. Pathak, Adv., Mr. G.S. Makker, Adv. And For Mr. B. Krishna Prasad, AOR For the Respondent(s) : Mr. Somnath Shukla, Adv., Ms. Ashwini Chandrasekaran, Adv., Mr. Udit Jain, Adv. And Mr. Praveen Kumar, AOR JUDGMENT N . V . RAMA NA , J . 1. This Constitution Bench is setup to examine the correctness of the ratio in Sun Export Corporation, Bombay v. Collector of Customs, Bombay , (1997) 6 SCC 564 [ hereinafter referred as Sun Export Case for brevity ], namely the question is What is the interpretative rule to be applied while interpreting a tax exemption provision/notification when there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, observing as follows- We have serious doubts as to whether the Bombay High Court judgment affirmed in Sun Export Corporation's case is correct. First and foremost, it is clear that the subsequent exemption Notification largely expanded the first Notification which referred only to animal feeds and nothing else. That being the case, it would be difficult to say that a large number of other categories which have subsequently been added would be clarificatory and therefore, retrospective. Further, we also feel that in view of the catena of judgments of this Court which have held that an exemption Notification has to be strictly construed (that is, if the person claiming exemption does not fall strictly within the letter of the Notification, he cannot claim exemption), have also been ignored by this Court in Sun Export Corporation's case in paragraph 13 thereof. Apart from this, the view of this Court in paragraph 13 that it is wellsettled that if two views are possible, one favourable to the assessee in matters of taxation has to be preferred is unexceptionable. However, this Court was not concerned in that case with the charging Section of a taxation statute. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra) and again placed the matter, before Hon ble the Chief Justice of India for constitution of an appropriate Bench, considering the fact that Sun Export Case (supra) was decided by a Bench comprising of three learned judges of this Court. Hence, this matter came to be placed before this Bench of Five Judges with following observations In paragraph 13 of the order of this Court in Sun s case, views have been expressed with regard to the interpretation of an exemption notification to support the conclusion reached. The same may require a reconsideration. That apart, in the referral order it has been noticed that Sun s Case (supra) has been distinguished in Collector of Central Excise, Guntur vs. Surendra Cotton Oil Mills Fert. Co. The basis on which the said distinction has been drawn needs to be further pursued. Having considered the matter at some length, we are of the tentative view, that the opinion expressed in Sun s case (supra) may require a reconsideration. Being a coordinate Bench, we believe we ought not to proceed any further in the matter. Hence, we direct the Registry to lay the papers before the Hon ble the Chief Justice of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax exemption notification, being Notification No. 234/1982 CE, dated 01.11.1982, issued by the Central Government under sub-section (1) of Section 25 of the Customs Act. The High Court considered the issue whether Vitamin AD-3 mix (feed grade)/animal feed supplement could be included under the head animal feed, including compound livestock feed . The Bombay High Court decided, in the affirmative, in favour of the assessee. The case then landed in this Court, which was persuaded to expand the meaning of animal feed in the light of subsequent notification issued in 1984, which largely expanded the scope of exemption to the effect that animal feed, including compound livestock feed, animal feed supplements and animal feed concentrates . This Court indeed countenanced the plea, namely, whenever there is ambiguity as to whether the subject matter was included or not, then the benefit of the same should be conferred on the assessee. The relevant portion in Sun Export Case (supra), reads as follows: 13. We are in agreement with the above view expressed by the Bombay High Court. No doubt it was contended on behalf of the Revenue that the contrary view taken by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation of a charging section, the one favourable to the assessee need to be applied. There is, however, confusion in the matter of interpretation of exemption notification published under taxation statutes and in this area also, the decisions are galore (See : Sun Export Corporation, Bombay v. Collector of Customs, Bombay and Anr., (1997) 6 SCC 564; Commissioner of Central Excise, Pune v. Abhi Chemicals and Pharmaceuticals Pvt. Ltd ., (2005) 3 SCC 541; Collector of Central Excise, Bombay1 and Anr. v. Parle Exports (Pvt.) Ltd ., (1989) 1 SCC 345; Commissioner of Customs (Import), Mumbai v. Konkan Synthetic Fibres , (2012) 6 SCC 339; Collector of Customs, Bombay v. Swastic Wollens (Pvt.) Ltd. And Ors ., (1988) Supp. SCC 796; Commissioner of Customs (Preventive), Gujarat v. Reliance Petroleum Ltd ., (2008) 7 SCC 220. ) 13. We may passingly, albeit, briefly reiterate the general principles of interpretation, which were also adverted to by both the counsel. In his treatise, Principles of Statutory Interpretation Justice G.P. Singh, lucidly pointed the importance of construction of statutes in a modern State as under: Legislation in modern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law in a given case; whether the Legislature intended to exclude operation of law in a given case; whether Legislature intended to give discretion to enforcing authority or to adjudicating agency to apply the law, are essentially questions to which answers can be sought only by knowing the intention of the legislation. Apart from the general principles of interpretation of statutes, there are certain internal aids and external aids which are tools for interpreting the statutes. 17. The long title, the preamble, the heading, the marginal note, punctuation, illustrations, definitions or dictionary clause, a proviso to a section, explanation, examples, a schedule to the Act etc., are internal aids to construction. The external aids to construction are Parliamentary debates, history leading to the legislation, other statutes which have a bearing, dictionaries, thesaurus. 18. It is well accepted that a statute must be construed according to the intention of the Legislature and the Courts should act upon the true intention of the legislation while applying law and while interpreting law. If a statutory provision is open to more than one meaning, the Court has to choose the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which the enactment is directed 19. The well settled principle is that when the words in a statute are clear, plain and unambiguous and only one meaning can be inferred, the Courts are bound to give effect to the said meaning irrespective of consequences. If the words in the statute are plain and unambiguous, it becomes necessary to expound those words in their natural and ordinary sense. The words used declare the intention of the Legislature. In Kanai Lal Sur v. Paramnidhi Sadhukhan , AIR 1957 SC 907, it was held that if the words used are capable of one construction only then it would not be open to the Courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act. 20. In applying rule of plain meaning any hardship and inconvenience cannot be the basis to alter the meaning to the language employed by the legislation. This is especially so in fiscal statutes and penal statutes. Nevertheless, if the plain language results in absurdity, the Court is entitled to determine the meaning of the word in the context in which it is used keeping in view the legislative purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian law and how the higher Courts have made a distinction while interpreting a taxation statute on one hand and tax exemption notification on the other. In Black s Law Dictionary (10th Edn.) strict interpretation is described as under: Strict interpretation. (16c) 1. An interpretation according to the narrowest, most literal meaning of the words without regard for context and other permissible meanings. 2. An interpretation according to what the interpreter narrowly believes to have been the specific intentions or understandings of the text s authors or ratifiers, and no more.Also termed (in senses 1 2) strict construction, literal interpretation; literal construction; restricted interpretation; interpretatio stricta; interpretatio restricta; interpretatio verbalis. 3. The philosophy underlying strict interpretation of statues.Also termed as close interpretation; interpretatio restrictive. See strict constructionism under constructionism. Cf. large interpretation; liberal interpretation (2). Strict construction of a statute is that which refuses to expand the law by implications or equitable considerations, but confines its operation to cases which are clearly within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iteralism is at the far end of the spectrum, wherein it accepts no implications or inferences, then strict interpretation can be implied to accept some form of essential inferences which literal rule may not accept. 25. We are not suggesting that literal rule de hors the strict interpretation nor one should ignore to ascertain the interplay between strict interpretation and literal interpretation . We may reiterate at the cost of repetition that strict interpretation of a statute certainly involves literal or plain meaning test. The other tools of interpretation, namely contextual or purposive interpretation cannot be applied nor any resort be made to look to other supporting material, especially in taxation statutes. Indeed, it is well settled that in a taxation statute, there is no room for any intendment; that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification. Equity has no place in interpretation of a tax statute. Strictly one has to look to the language used; there is no room for searching intendment nor drawing any presumption. Furthermore, nothing has to be read into nor should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax law, which although not to be overstressed ought not to be forgotten that, the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax on him , [Russel v. Scott, (1948) 2 All ER 1]. The proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible [Ormond Investment Co. v. Betts, (1928) AC 143]. Considerations of hardship, injustice or anomalies do not play any useful role in construing taxing statutes unless there be some real ambiguity [Mapp v. Oram, (1969) 3 All ER 215]. It has also been said that if taxing provision is so wanting in clarity that no meaning is reasonably clear, the courts will be unable to regard it as of any effect [IRC v. Ross and Coutler, (1948) 1 All ER 616]. Further elaborating on this aspect, the learned author stated as follows: Therefore, if the words used are ambiguous and reasonable open to two interpretations benefit of interpretation is given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to the subject and there is nothing unjust in a taxpayer escaping if the letter of the law fails to catch him on account of Legislature s failure to express itself clearly . 27. Now coming to the other aspect, as we presently discuss, even with regard to exemption clauses or exemption notifications issued under a taxing statute, this Court in some cases has taken the view that the ambiguity in an exemption notification should be construed in favour of the subject. In subsequent cases, this Court diluted the principle saying that mandatory requirements of exemption clause should be interpreted strictly and the directory conditions of such exemption notification can be condoned if there is sufficient compliance with the main requirements. This, however, did not in any manner tinker with the view that an ambiguous exemption clause should be interpreted favouring the revenue. Here again this Court applied different tests when considering the ambiguity of the exemption notification which requires strict construction and after doing so at the stage of applying the notification, it came to the conclusion that one has to consider liberally. 28. With the above understanding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Bengal Finance (Sales Tax) Act, 1941 provided for exemption to sales to the Indian Stores Department, the Supply Department of the Government of India, and any railway or water transport administration . The Court was to interpret the aforesaid provision in order to ascertain whether the sale to the Government of India, Ministry of Industries and Supplies would be covered under the Section. 30. The majority was of the view that the Government of India, Ministry of Industries and Supplies was not similar to those mentioned in the exemption notification. The majority extensively relied on the history and origin of Ministry of Industries and Supplies and concluded that the functions of the aforesaid Ministry were different from the erstwhile departments mentioned under the exemption provision. The majority reasoned that the exemption being the creation of the statute itself, it should have to be construed strictly and the interpretation cannot be extended to sales to other departments. We might find some clue as to the content of a strict construction also. It was canvassed before the Court that the object of Section 5(2)(a)(iii) of the relevant statute, was to give exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of the exemption. The High Court in answering that question in the negative has gone upon mere nomenclature. It has emphasized the change in the name and overlooked the substance of the matter. 33. The minority construed strict interpretation to be an interpretation wherein least number of determinates in terms of quantity would fall under the exemption. The minority referred to an old English case of Commissioner of Inland Revenue v. James Forrest , (1890) 15 AC 334. It may be relevant to note that the minority could not find the justification to apply strict interpretation as the exemption notification was broad enough to include exemptions for commodities purchased by the Government of India. The Court was of the opinion that the strict interpretation provided by the majority was uncalled for as there was no additional burden on others by giving such exemptions. The relevant observations are as follows- The High Court referred to the observations of Lord Halsbury in the case of Commissioner of Inland Revenue v. James Forrest (1890) 15 AC 334, to the effect that exemptions from taxation should be strictly construed because otherwise the burden of taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re cotton from a cooperative society during the relevant period. The society had agreed to carry out the weaving work for the appellant on payment of fixed weaving charges at Re.0.19 np. per yard which included expenses the society would have to incur in transporting the aforesaid cotton fabric. In the years 1959 and 1960, the Government issued an exemption notification which exempted cotton fabrics produced by any cooperative society formed of owners of cotton power looms, registered on or before 31st March, 1961. The question before the Court was whether the appellant who got the cotton fabric produced from one of the registered cooperative society was also covered under the aforesaid notification. It may be of some significance that the revenue tried to interpret the aforesaid exemption by relying on the purposive interpretation by contending that the object of granting the above exemption was to encourage the formation of cooperative societies which not only produced cotton fabrics but also consisted of members, not only owning but having actually operated not more than four power looms during the three years immediately preceding their having joined the society. The policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity had in mind but by the words which it has employed to effectuate the legislative intent. 35. In the judgment of two learned Judges in Union of India v. Wood Papers Limited , (1990) 4 SCC 256 [ hereinafter referred as Wood Papers Ltd. Case for brevity ], a distinction between stage of finding out the eligibility to seek exemption and stage of applying the nature of exemption was made. Relying on the decision in Collector of Central Excise vs. Parle Exports (P) Ltd. , (1989) 1 SCC 345, it was held Do not extend or widen the ambit at the stage of applicability. But once that hurdle is crossed, construe it liberally . The reasoning for arriving at such conclusion is found in para 4 of Wood Papers Ltd. Case (supra), which reads- Literally exemption is freedom from liability, tax or duty. Fiscally, it may assume varying shapes, specially, in a growing economy. For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective etc. That is why its construction, unlike charging provision, has to be tested on different touchstone. In fact, an exemption provision is like an exception and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances, the Deputy Commissioner could withold the permission. 37. This Court while accepting the interpretation provided by the appellant, observed on the aspect of strict construction of a provision concerning exemptions as follows: There is support of judicial opinion to the view that exemptions from taxation have a tendency to increase the burden on the other unexempted class of tax payers and should be construed against the subject in case of ambiguity. It is an equally well known principle that a person who claims an exemption has to establish his case. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the legislature manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only where the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. It appears to us the true rule of construction of a provision as to exemption is the one stated by this Court in Union of India v. Wood Papers Ltd. [(1990) 4 SCC 256 = 1990 SCC (Tax) 422 = JT (1991 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be construed strictly with certain exceptions depending upon the settings on which the provision has been placed in the statute and the object and purpose to be achieved. If exemption is available on complying with certain conditions, the conditions have to be complied with. The mandatory requirements of those conditions must be obeyed or fulfilled exactly, thought at times, some latitude can be shown, if there is failure to comply with some requirements which are directory in nature, the noncompliance of which would not affect the essence or substance of the notification granting exemption. 39. The Constitution Bench then considered the doctrine of substantial compliance and intended use . The relevant portions of the observations in paras 31 to 34 are in the following terms 31. Of course, some of the provisions of an exemption notification may be directory in nature and some are mandatory in nature. A distinction between the provisions of a statute which are of substantive character and were built in with certain specific objectives of policy, on the one hand, and those which are merely procedural and technical in there nature, on the other, must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confusingly or incorrectly written that an earnest effort at compliance should be accepted. 34. The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases and quite often, the critical question to be examined is whether the requirements relate to the substance or essence of the statute, if so, strict adherence to those requirements is a precondition to give effect to that doctrine. On the other hand, if the requirements are procedural or directory in that they are not of the essence of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance. In other words, a mere attempted compliance may not be sufficient, but actual compliance with those factors which are considered as essential. 40. After considering the various authorities, some of which are adverted to above, we are compelled to observe how true it is to say that there exists unsatisfactory state of law in relation to interpretation of exemption clauses. Various Benches which decided the question of interpretation of taxing statute on one hand and exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no implied power of taxation. The tax power must be specifically conferred and it should be strictly in accordance with the power so endowed by the Constitution itself. It is for this reason that the Courts insist upon strict compliance before a State demands and extracts money from its citizens towards various taxes. Any ambiguity in a taxation provision, therefore, is interpreted in favour of the subject/assessee. The statement of law that ambiguity in a taxation statute should be interpreted strictly and in the event of ambiguity the benefit should go to the subject/assessee may warrant visualizing different situations. For instance, if there is ambiguity in the subject of tax, that is to say, who are the persons or things liable to pay tax, and whether the revenue has established conditions before raising and justifying a demand. Similar is the case in roping all persons within the tax net, in which event the State is to prove the liability of the persons, as may arise within the strict language of the law. There cannot be any implied concept either in identifying the subject of the tax or person liable to pay tax. That is why it is often said that subject is not to be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be read along with the Act. The notification must be read as a whole in the context of the other relevant provisions. When a notification is issued in accordance with power conferred by the statute, it has statutory force and validity and, therefore, the exemption under the notification is as if it were contained in the Act itself. See in this connection the observations of this Court in Orient Weaving Mills (P) Ltd. v. Union of India, 1962 Supp 3 SCR 481 = AIR 1963 SC 98. See also Kailash Nath v. State of U.P., AIR 1957 SC 790. The principle is well settled that when two views of a notification are possible, it should be construed in favour of the subject as notification is part of a fiscal enactment. But in this connection, it is well to remember the observations of the Judicial Committee in Coroline M. Armytage v. Frederick Wilkinson, (1878) 3 AC 355, that it is only, however, in the event of there being a real difficulty in ascertaining the meaning of a particular enactment that the question of strictness or of liberality of construction arises. The Judicial Committee reiterated in the said decision at page 369 of the report that in a taxing Act provisions enacting an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erpreting the applicability of exemption clause strictly, the Court may construe the notification by giving full play bestowing wider and liberal construction. The ratio of Parle Exports Case (supra) deduced as follows: Do not extend or widen the ambit at stage of applicability. But once that hurdle is crossed, construe it liberally . 47. We do not find any strong and compelling reasons to differ, taking a contra view, from this. We respectfully record our concurrence to this view which has been subsequently, elaborated by the Constitution Bench in Hari Chand Case (supra). 48. The next authority, which needs to be referred is the case in Mangalore Chemicals (supra) . As we have already made reference to the same earlier, repetition of the same is not necessary. From the above decisions, the following position of law would, therefore, clear. Exemptions from taxation have tendency to increase the burden on the other unexempted class of tax payers. A person claiming exemption, therefore, has to establish that his case squarely falls within the exemption notification, and while doing so, a notification should be construed against the subject in case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entitled for exemption. We are pointing out this aspect to dispel any doubt about the legal position as explored in this decision. As already concluded in para 50 above, we may reiterate that we are only concerned in this case with a situation where there is ambiguity in an exemption notification or exemption clause, in which event the benefit of such ambiguity cannot be extended to the subject/assessee by applying the principle that an obscure and/or ambiguity or doubtful fiscal statute must receive a construction favouring the assessee. Both the situations are different and while considering an exemption notification, the distinction cannot be ignored. 52. To sum up, we answer the reference holding as under - (1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. (2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue. (3) The ratio in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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